Why a $2 trillion asset manager forecasts the Magnificent 7 to underperform this year

• Amundi, one the largest asset managers in the world, expects 2023's top stocks to underperform in 2024.
• Strategists expect a mild recession, and say the market's top performers will to fall back to earth.

Amundi, a European asset management giant with $2 trillion under management, expects slower economic growth in the year ahead — and as a result, weaker performance from top-performing mega-cap stocks.

In a Wednesday panel at the New York Stock Exchange, Amundi US' head of equity research, Craig Sterling, said the firm is underweight US stocks for 2024, and the stock market today is far different from a year ago.

"While we would expect the Mag 7 to trade at a premium to the overall market given mostly superior growth and margins, the concentration of the top of the market and its valuation gap with the average stock is historic," Sterling told Business Insider. "This dynamic generally does not end well."

The S&P 500 enjoyed a banner 2023 with a 25% climb, but the Magnificent Seven stocks — Apple, Tesla, Microsoft, Amazon, Nvidia, Meta, and Alphabet — did the heavy lifting. Sharp rallies among the seven companies accounted for more than 60% of the benchmark index's gains last year.

Sterling said one reason the Magnificent Seven outperformed in 2023 was because of the exceptionally low expectations for earnings. Those Big Tech firms were able to cut costs and demonstrate a better trajectory than other companies for most of the year.

In fourth-quarter earnings, the group is expected to grow earnings by 46%. Estimates say the other 493 stocks, meanwhile, together will see an earnings decline of 7% — a lopsided trend that's persisted over multiple quarters.

"AI-euphoria has taken the baton," Sterling said. "Typically, the market tends to overestimate the short-term impact of new technologies, which leads to disappointments for the stocks."

The coming economic slowdown

Amundi's US team recommends investors to limit exposure to areas with "excess valuations," as they are not properly priced for a global slowdown. Strategists maintain a base case for a mild recession in the US and a softer performance for stocks.

In a follow-up fireside chat at the Wednesday event, Amundi chief investment officer Marco Pirondini said the firm is indeed underweight on the Magnificent Seven stocks, which benefited from the momentum of a decade of minimal interest rates on their way to extended valuations.

"The US is very expensive relative to itself and to the world," Pirondini said. Looking ahead, he noted bonds look attractive and appear to have limited downside, and they could be poised to benefit from a Fed pivot and easing inflation.

The exec also said that Amundi is monitoring names in the financial sector in the year ahead, for stocks both in and outside the US.

Even as markets have already started to price in meaningful rate cuts from the Fed, which would support stocks in the Magnificent Seven, Amundi believes the anticipation is too optimistic at this time. Higher-for-longer rates could instead drag on stocks and earnings.

In any case, much of Wall Street has an upbeat outlook. Ned Davis Research, Bank of America, RBC, and Goldman Sachs, among others, have voiced soft-landing calls and a continued rally in US equities. The Federal Reserve will be able to engineer a no-recession scenario, those firms believe, ultimately providing a boon for investors.

"As the economy and its subcomponents of inflation and interest rates normalize," Sterling said, "we expect that the market to broaden out and start to look past an economic slowdown or recession and the many operating distortions which should benefit the average stock growth."